Home > The Economy > President Obama’s big deal: Cuts for Social Security but no taxes for Wall Street

President Obama’s big deal: Cuts for Social Security but no taxes for Wall Street

from Dean Baker

The ability of Washington to turn everything on its head has no limits. We are in the midst of the worst economic downturn since the Great Depression. Even though the recession officially ended two years ago, there are still more than 25 million people who are unemployed, can only find part-time work, or who have given up looking for work altogether. This is an outrage and a tragedy. These people’s lives are being ruined due to the mismanagement of the economy. 

And, we know the cause of this mismanagement. The folks who get paid to manage and regulate the economy were unable to see an $8 trillion housing bubble. They weren’t bothered by the doubling of house prices in many areas, nor the dodgy mortgages that were sold to finance these purchases. Somehow people like former Federal Reserve Board chairman Alan Greenspan and his sidekick and successor Ben Bernanke thought everything was fine as the Wall Street financers made billions selling junk mortgage and derivative instruments around the world.

When the bubble burst, one of the consequences was an increased budget deficit. This is kind of like two plus two equals four. The collapsing bubble tanked the economy. Tax revenue plummets and we spend more on programs like unemployment insurance and foods stamps. We did also have some tax cuts and stimulus spending to boost the economy. The result is a larger budget deficit.

All of this is about as clear as it can possible be. The large deficit came about because the housing bubble, which was fueled by Wall Street excesses, crashed the economy. Yet, we are constantly being told by politicians from President Obama to Tea Party Republicans that we have a problem of out-of-control spending.

The claim of out-of-control spending is simply not true. It is an invention, a fabrication, a falsehood with no basis in reality that politicians are pushing to advance their agenda. And that agenda is not pretty.

According to numerous reports in the media, President Obama wants a “big deal,” on the budget that will involve cuts to Medicaid, Medicare and Social Security. The last is especially ironic, since Social Security is financed by its own designated tax. Therefore it does not contribute to the deficit. If there is no money in the Social Security trust fund, then benefits will not be paid.

The plans to cut to Social Security also seem perverse since we know that the vast majority of retirees are not living especially well right now and the benefits already are not especially generous. If we exclude their Social Security income, more than 80 percent of people over the age of 65 get by on less than $20,000 per year.

The average Social Security check is about $1,100 a month. This would be less than an hour’s pay for many of the Wall Street honchos whose greed and incompetence brought down the economy.

Yet, when President Obama preaches equality of sacrifice, it is the elderly and the poor who are supposed to do most of the sacrificing. His plan to change the annual cost-of-living adjustment formula for Social Security would reduce benefits for someone in their 70s by 3 percent, in their 80s by 6 percent, and in their 90s by 9 percent.

These are huge cuts. The Republicans are screaming bloody murder because President Obama wants to raise the top tax rate by 4.6 percentage points. Imagine that he proposed raising taxes on the wealthy by twice as much. That is effectively what he is proposing for people in their 90s who are entirely dependent on Social Security.

And he is proposing to impose this tax on seniors who had nothing to do with the crisis, while leaving Wall Street untouched. A modest tax on financial speculation could raise more than $150 billion a year or $1.5 trillion over the course of a decade.

It is striking that a financial speculation tax (FST) has not been mentioned in the debt discussions. The European Union has been actively debating the imposition of an FST ever since the crisis. The European Parliament voted for such a tax by a margin of more than 3 to 1. The United Kingdom has had an FST for decades. It raises the equivalent, relative to the size of its economy, of almost $40 billion a year just by taxing stock trades. Even the IMF has come out in support of increased taxes on the financial sector.

Presumably the continuing power of the financial industry explains why few in Washington are discussing an FST. After all, a director of Morgan Stanley, Erskine Bowles, was the head of President Obama’s deficit commission.

And this explains why we are looking to gut Social Security and Medicare in response to Wall Street’s wreckage of the economy. The basic story is that the average worker and retiree will have to sacrifice because of the damage that the Wall Street crew did to the economy. That is what democracy in America looks like now.

See article on original website

  1. July 19, 2011 at 5:29 pm

    Well said Dean — but who in Washngton is listening??

    Until we econmoists reintroduce Abba Lerner’s functional finance concept into the public debate — you are always going to be on the losing side of this debate about deficits.

    Implicit in your argument is that deficits are always bad — and the only question is who should bear the burden of closing the deficit. That is not the major issue– the major issue si that those who run our federal government are responsible for assuring that all who want to work in the USA can get a JOB!!

    And as long as some invcome earners in the USA are nto speding all the income they could earn at full employment then other spenders in the USA must deficit to offset the savings depressing effects.

  2. Ken Zimmerman
    July 19, 2011 at 6:07 pm

    You’re surrounded by advisors who tell you the biggest issue out there is the size of the government budget deficit, and how to reduce it. Republicans and most Democrats in Congress say the same. A few, like Senator Bernie Sanders disagree. But they’re distinct and not very powerful minority. Your re-election advisors tell you unless you reach a deal or overcome the Republicans in the House on a deficit deal you’re re-election chances are nil. You see poll after poll that say the deficit is the number one issue for most Americans. Fox and even some non-crazy media outlets rag on you each day about solving the deficit problem. Town-hall after town-hall people tell you’re they’re worried the deficit is destrying “their” America. Sure some are still worried about unemployment and the working class (e.g., Elizabeth Warren. But they’re not popular, even with those they’re trying to defend.Welcome to President Obama’s world. What would you do?

    • Mike Meeropol
      July 19, 2011 at 7:17 pm

      But Ken, the polling data indicates that when asked to rank concerns, the vast majority of Americans are concerned about JOBS and the deficit ranks way down there.

      Obama’s biggest mistake was in LISTENING to the very people who brought on this mess — Tim Geithner, Larry Summers, etc. Many of us economist-types who supported Obama against Clinton in the primaries hoped we would NOT get “warmed over Clintonism” for economic policy — but that’s just what we got.

      No matter now small we are as a minority we have to YELL as loudly as we can to try and penetrate the destructive mind-set of so many people about budget deficits and who is to blame for where the economy is today.

      Please keep it up Dean ….

  3. merijnknibbe
    July 19, 2011 at 7:17 pm

    A modest increase of gasoline taxes of about 4,50 per gallon… yields about,– in the USA over the next decade – at no macro cost, as most oil is imported. And think of the environmental benefits when this tax changes driving behavior.

  4. Jeff Z.
    July 19, 2011 at 9:10 pm

    Most polls show what Mike Meeropol says they do. For Example,



    Granted, these are for 2010, but I wager current numbers are similar. But this points to the fact that few understand some very basic facts about the U.S. Economy. Again, Mike was on point here, asking “what are we economists teaching people about this.”

    It also points to the fact that few in the press know any better. This is a disgrace, at least in the U.S. The people in the press are supposed to be able to evaluate information, or at least be able to tell the reader when a government official, CEO or activist is lying. In this day and age, such evaluation always brings charges of “ideological bias” against the reporter and the news outlet, so we are reduced to reading competing claims. That makes it all the more important to get this information out there as much as possible, and Dean is (seemingly)tireless in this regard.

  5. John B.
    July 19, 2011 at 9:15 pm

    Republicans refuse to consider closing the carried-interest loophole that lets multi-millionaire hedge fund managers pay a 15% income tax. They refuse to consider ending taxpayer subsidization of the most profitable industry in the history of the world, the oil industry, which has an ad campaign telling taxpayers: you can pay me now or pay me later. They want to increase defense spending, which is the only discretionary account that materially contributes to the deficit. This is insanity! They keep saying how wrong it would be to raise taxes on the “job-creators.” Well, where the hell are these job-creators and why aren’t they creating jobs now?

  6. Allen Cookson
    July 19, 2011 at 11:49 pm

    You all seem to be overlooking private debt with its accompanying destruction of America’s productive capacity which is responsible for increased unemployment. No nation can borrow for ever to fund its consumption. This administration’s and its predecessor’s entrancement by free trade are largely responsible for the private debt. Read Keynes, Harry Dexter White and Robert Wade (London School of Economics) on the need for balanced trade. A balanced trade treaty ( not bilateral balance but total balance with all treaty partners) would be easier to negotiate than current liberalization attempts. There would need to be penalties for increasing import barriers. Surplus nations would have to loosen import restrictions and/or sell less. With this sort of trade regime the US could rebuild its productive capacity and end the unemployment crisis. More work means more tax revenue and improvement in the public debt situation. The finance industry with its chimeras of prosperity must be tightly regulated. A balanced trade treaty, by replacing the US dollar as the world reserve currency with an international currency unit would do much to solve the particular problems of the US. It would also help deal with America’s excessive oil consumption (See Merijyn’s comment above) as imports would become more expensive.

    • Alice
      July 20, 2011 at 8:07 am

      Allen says “You all seem to be overlooking private debt with its accompanying destruction of America’s productive capacity which is responsible for increased unemployment. ”

      I think the other thing we are overlooking is the enormous power and guaranteed incomes (and protection) given to thev financial sector. Keynes said “trade goods and services Oseas, take yourselves overseas but keep your banks at home”

      It is the finabcial sector who has gambled up stocks with the guaranteed drip feed of all our super and savings which is largely responsible for the global turnover of stocks, companies, and now whole nations at inflated prices. The financial sector has gambled on the entire world at prices above what should have been paid for productive businesses. It has gambled those businesses, out of business. It does so because it has the money (a meaningless term in the bubble) to do so. The financial sector has command of, simply too much money which has devalued the term money.There was nowhere else for those funds to go except into rampant speculation. There simply arent enough productive businesses for all that money the financial sector has command off. Too much money produces ….not inflation but inflated asset values. Friedman got it wrong. Saving the banks is the enemy of all people working towards a productive end everywhere. It is the banks who need to deflate, not the productive working man through austerity measures.

      We will all realise it – sooner or later. The entire global financial system, now, is unsustainable and it will correct, come what may.

      There is no recovery on the horizon without it.

  7. charlie thomas
    July 20, 2011 at 5:19 pm

    great article, unfortunately not widely reported and undermined at every turn by mass media and by right wing talk radio
    why did Obama go with Summers Geithner Bernanke?? what kind of change was that?

    those two questions have bothered me since the beginning of this administration.

    July 24, 2011 at 3:47 am

    Save the Gambling Bankers
    July 22, 2011
    By Michael Hudson

    July 24, 2011 at 4:05 am


    A Collection of Debt Ceiling Stories

    July 22, 2011:

    Obama and the “Gang of Six”

    James K. Galbraith: “Gang of Six” Plan is all about cuts not increased taxes; Obama represents Wall Street faction of Democratic Party July 21, 2011

    Moody’s Says Problem is Not the Debt, it’s the Debt Ceiling

    Mark Weisbrot: The debt ceiling debate is a manufactured crisis July 19, 2011

    Debt Ceiling Debate “Fraud”

    David Swanson: Polling shows majority of Americans want to tax the rich and cut the military before making social program cuts July 17, 2011

    Obama Sells Politics of Austerity

    Tom Ferguson: 69% of Americans aren’t wrong opposing more debt, there are other choices July 11, 2011

    Debt Ceiling Charade a Move to the Right

    Michael Hudson: Panic about debt ceiling used to attack social programs; no real need for more borrowing July 12, 11

    Greece–a Dress Rehearsal for United States

    Michael Hudson: Cuts to Social Security and Medicare and privatization at the state level mirror strategy imposed on Greece July 11, 2011

    Toronto G-20: Denying Civil Rights is a Crime

    Paul Jay: Responsibility for G-20 “Days of Infamy” mainly RCMP and Federal Gov. July 6, 2011

    Wisconsin Cuts Public School Budget

    Governor Walker’s approved Wisconsin State Budget includes deep spending cuts in public education, expansion of “Voucher School” Program June 29, 11

    Sovereign Debt Crisis Excuse to Re-fight Thatcher-Reagan Wars

    Bill Janeway: No realistic chance that US or UK will default on debt but threat used to achieve Reagan-Thatcher objectives April 12, 2011

    Wrestle Mania Over Debt Ceiling

    Tom Ferguson: All the insiders in DC already know the outcome of Debt Ceiling Debate July 23, 11

    Republicans’ Deficit Ceiling Bluff an Attack on Social Security

    William K. Black: Forces pushing for cuts in social security preparing conditions for its demise January 4, 2011

    Is Unemployment “Natural”?

    Bubbles Make Rich Richer Pt.2. Austerity measures will create higher “natural unemployment” October 19, 2010

    Austerity Budget Means More Unemployment

    Dean Baker: Obama is arguing on the Republican’s turf, he’s lost control of the debate February 14, 2011

    Cutting Public Sector Wages Will Make Recession Worse

    Bob Pollin and Jeff Thompson: Public sector wages are not higher than comparable private sector; cuts will fuel recession February 25, 2011

    Austerity Hawks Want a Return to 1920’s Capitalism

    James Crotty: Objective of austerity campaign is a return to unregulated capitalism and weak unions May 5, 2011

    High Deficits were the Objective of Right Economics

    James Crotty: High deficits

  12. Bruce E. Woych
    July 28, 2011 at 7:30 pm

    The “OTHER”
    Michael W.Hudson is a former Wall Street economist AND JOURNALIST. “THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis” (2010, Times Books}

    July 31, 2011 at 4:11 am

    July 31, 2011 at 4:06 am | #5
    Reply | Quote

    and lest we forget that the “secular” government is more militarized now in strategically captured positions, while the military are retiring to take over the secular top spots; even as every TV show is adulterated with glowing uniform conformity and pride for a professional killing force that is doing a job for corporate American Interests, …and those interests are to eventually entrap this very domestic economy under financial domination enforced by those same “outsourcing” mercenary mentalities that are orchestrating the directions of our economic well being. Heats ON!

    Lets get REAL!

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